“The rights of minority shareholders are an important and rapidly developing branch of law. It raises difficult questions of principle: the conflicts between the letter and the spirit of the company’s constitution; between the sanctity of the bargain between shareholders embodied in the articles and unfair treatment; between giving a remedy which is effective and allowing it to become an institution of abuse; between the attainment of fairness and the amount of money parties can spend on litigation”.[1]

Majority rule vs minority protection. These are the diametrically opposed fundamental underpinnings of corporate lawthat have shaped and continue to shape our corporate law environment, creating a finely balanced situation where the majority could be said to rule, but only to a limited extent.  The majority’s power has been curbed by both judicial and statutory intervention.  Whether this intervention has created an appropriate set of checks and balances, or led to the tyranny of the minority has become a bone of significant contention.

While the Maltese Companies Act provides for a broad array of rights which are given to minority shareholders, this article will focus on the two articles most frequently invoked.  That is the unfair prejudice remedy, article 402 of the Companies Act, and the winding up of a company on ‘grounds of sufficient gravity’, article 214(2)(b)(iii) of the Companies Act.

A list of other protection measures granted to minority shareholders under the Companies Act, may be found towards the end of this article.

THE UNFAIR PREJUDICE REMEDY, ARTICLE 402, COMPANIES ACT

This article gives any shareholder the company (whether majority shareholder or otherwise) the opportunity to make an application to the court if he/she feels that the:

“Affairs of the company have been or are being or are likely to be conducted in a manner that is, or that any acts or omissions of the company have been or are likely to be, oppressive, unfairly discriminatory against or unfairly prejudicial to a member or members or in a manner that is contrary to the interests of the members as a whole”.

The court is granted a wide breadth of discretion on the appropriate redress to apply in each particular situation. Thus, we find that the Court may, if it is of the opinion that the complaint is well-founded, and that it is just and equitable to do so, make orders:

“(a) regulating the conduct of the company’s affairs in the future; or

(b) restricting or forbidding the carrying out of any proposed act; or

(c) requiring the company to do an act which the applicant has complained it has omitted to do; or

(d) providing for the purchase of the shares of any members of the company by other members of the company or by the company itself and, in the case of a purchase by the company, for the reduction accordingly of the company’s issued share capital; or

(e) directing the company to institute, defend, continue or discontinue court proceedings, or authorising a member or members of the company to institute, defend, continue or discontinue court proceedings in the name and on behalf of the company; or

(f) providing for the payment of compensation by such person as may have been found by the court responsible for loss or damage suffered as a result of the act or omission complained of, to the person suffering the said loss or damage; or 

(g) dissolving the company and providing for its consequential winding up.”

Furthermore, in terms of the said article of the law, the Court may order that the company amend its Memorandum and Articles of Association.

A point duly settled by the Maltese Courts is that in order for an Article 402 action to be successful, the conduct complained of must be deemed by the Court to be oppressive, unfairly discriminatory and unfairly prejudicial, but not necessarily to the plaintiff.  It is sufficient that the acts or omissions complained of are oppressive, discriminatory or unfairly prejudicial with respect to another member of the company, or to the interests of the shareholders. The Court has noted that it is not sufficient to simply complain that the conduct in question was contrary to the interests of the members as whole.[2]

Furthermore, in relation to determining whether conduct as described above has occurred, the Court[3] declared that one must first look at whether the affairs of the company were being conducted according to the statute of the company.  However, in the application of this provision, which is inspired from principles of equity rather than rights which are strictly legal, the Court should take legitimate expectations into consideration.  These rights are often wider than those strictly legal provisions which emerge from the statute of the company.  These legitimate expectations emanate from personal relationships between the shareholders.  In the well-known case of Ebrahimi v Westbourne Galleries Limited ([1973] AC 360) Lord Wilberforce listed a number of situations where this remedy could be given, situations which are often found in small private company often called quasi-partnerships, such as:

• an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company;
• an agreement, or understanding, that all, or some (for there may be “sleeping members”) of the shareholders shall participate in the conduct of the business;
• restriction upon the transfer of the members’ interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.

The Court appears to have imported notions developed by English jurisprudence in relation to the liquidation of companies on the ‘just and equitable’ ground, to the doctrine of the unfair prejudice remedy.  Furthermore, in the case of Ronald Azzopardi vs. Taormina Holdings Limited et,[4] the Court declared that the Courts have a wide breadth of discretion in order to decide whether the behaviour to the detriment of the minority as described by Article 402 occurred, as well as in the remedy it may grant.

However, the Court does not appear to apply this principle in the context of public companies.  In fact, the Maltese Court in the case of Ivor John Zammit vs. Bank of Valletta,[5] the Court quoted the case Re Astec BSR Ltd,“the concept of legitimate expectations…can have no place in the context of public listed companies”.  The Court went on to quote Sealy:

“The more clearly and fully the parties have spelt out their arrangement, the less scope there will be for the court to find that there were other, unrecorded ‘expectations’. And if the company is a public company…the court is most unlikely to take notice of any alleged arrangement that is not recorded in the company’s published documents, for to do so would fly in the face of the principle that all material information must be disclosed to potential investors.”

This remedy is quite clearly the greatest protection granted to minority shareholders.  Apart from its far-reaching consequences, the uncertainty which its wide breadth creates leaves majority shareholders very wary of having this article invoked.  It is noteworthy that Article 402 may be invoked by any member of the company, and is therefore also open to majority shareholders, not just minority shareholders.

THE DISSOLUTION AND CONSEQUENTIAL WINDING UP OF A COMPANY, ARTICLE 214 COMPANIES ACT

Article 214 Companies Act defines the parameters in relation to when and how a company is to be dissolved and consequently wound-up.  This Article differentiates between instances where the Court has discretion to wind-up a company, and those where the court has no such discretion, and must proceed to order its winding up.

Whilst most of the scenarios envisaged by this Article refer to clear, well-defined instances when the Court ‘may’ (or ‘shall’ – depending on the circumstances) dissolve a company, there is one ground where the Court is awarded a large margin of discretion, that is where grounds of ‘sufficient gravity’ which warrant the dissolution of the company exist.    This article does not require that other remedies be exhausted prior to the institution of this action, however any such previously pursued remedies will be taken into consideration by the Court when determining whether grounds of sufficient gravity exist.

The Courts have declared that they possess a wide margin of discretion in relation to deciding whether these grounds of ‘sufficient gravity’ exist.  The law, unfortunately does not provide the Court with any guidance whatsoever as to what does and what does not constitute such a ground. And this was clearly a deliberate discretion allowed to the Courts as a catch-all remedy to be applied where circumstances so warrant.

Once such grounds of ‘sufficient gravity’ are deemed to exist, the Court has no further option other than that of ordering that the company is duly dissolved and wound up.  It has been established by jurisprudence that the Courts are not only permitted to regard conduct which occurred prior to the institution of this action, but may also take cognisance of anything which happens during the course of proceedings, until the Court reaches final judgment.  Suffice it to say that this article has developed into a rather powerful tool in the hands of the minority, and that it must be carefully applied by the Courts given the final nature of the dissolution.

THE OVERLAP BETWEEN THE ARTICLE 402(3)(G) AND ARTICLE 214(2)(B)(III) COMPANIES ACT

While there appears to be some overlap between the above captioned articles, in relation to the dissolution and winding up of a company, the criteria required to invoke the two differ quite substantially.

In order for a winding up order to be given under article 214(2)(b)(iii) Companies Act, the applicant need only demonstrate grounds of sufficient gravity.   However, under article 402(3)(g) of the Companies Act, the applicant must first prove either oppression, unfair prejudice or unfair discrimination.  Once this is proven, the demand must then pass the ‘just and equitable’ test.

Therefore, whilst Article 402 is arguably the best weapon in the hands on the minority, and provides for a vast array of remedies in relation to the request for dissolution and winding up of a company, article 214(2)(b)(iii) Companies Act seems to be a more apt choice for an aggrieved minority shareholder.

However, the latter suffers from weakness at remedial level.  If the company is prospering, dissolving the company could be tantamount to killing the goose that just might lay the golden egg.  This said, the threat to litigation may motivate parties to negotiate an alternative solution.

OTHER RIGHTS GRANTED TO MINORITY SHAREHOLDERS UNDER THE MALTESE COMPANIES ACT

Besides the remedies considered above, it is worth mentioning that the Maltese Companies Act provides for additional mechanisms and remedies intended to protect minority shareholders. These are set out below in tabular form for ease of reference.

INDIVIDUAL MEMBERSHIP RIGHTS

• Right to receive notice of general meetings
• Right to request the court to order the holding of a general meeting
• Right to request the court to appoint a director, if the number of directors falls below the statutory minimum (for private companies this is one (1))
• Right to request the court appoint an auditor

QUALIFIED MINORITY RIGHTS

Maltese law provides for a number of mechanisms and procedures intended to protect and safeguard the interests of minority shareholders, whilst on the other hand ensuring that companies continue to operate unhindered in the face of malicious or vexatious claims brought by shareholders whose personal interests effectively eclipse those of the company as a whole. Indeed, when the Courts are faced with such disputes, they are charged with a tremendous responsibility of carefully considering the facts and circumstances at hand, ensuring that the wider commercial interests of the company in question are properly and effectively handled to minimise the prejudice caused to the various stakeholder and within the spirit of the law. A balancing act which, no doubt, will continue to challenge our Courts, academics and corporate practitioners alike.

[1] Nicholas Grier, UK Company Law (1st, John Wiley & Sons 1998) 310-313

[2] George Borg vs. Primrose Poultry Products Limited et, First Hall of the Civil Court, 16th January 2012.

[3] Philomena Ellul vs. Charles Ellul, Court of Appeal (Superior), 31st January 2003.

[4] First Hall of the Civil Court, 13th June 2011

[5] First Hall of the Civil Court, 31st May 2006

[6] [1998] 2 BCLC 556